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Basic Estate Planning Terms & Concepts

ANNUAL EXCLUSION – An exclusion from gift taxes that allows a person (donor) to give up to $15,000 of assets to each person (donee) in any given year without having to pay any gift tax. A married donor can split a gift with a spouse and thereby give $30,000.00 of assets to each donee. Note that for many years the amount was $10,000, and therefore many people still refer to it as the “$10,000 gift limit.”

BOND – A statutory requirement that an Executor or Testamentary Trustee qualifying to administer an estate or trust personally obligate himself for the assets he will handle.

DISCLAIMER – A right that any beneficiary has to decline or “disclaim” all or any part of a bequest within nine (9) months of the date of death under a will or a trust funded under a will or a contract payable by reason of a death, such as a life insurance policy or a survivorship account. This is used primarily for post-death tax planning.

FEDERAL ESTATE TAX – The tax payable to the United States Government on the net taxable estate, after taking deductions for estate expenses, payment of debts, the marital and charitable deductions and the unified credit.

INHERITANCE TAX – The tax payable to a decedent’s state by a person who inherits property from the decedent. The Inheritance Tax differs from the Estate Tax in that the estate tax is levied against the decedent’s estate whereas an inheritance tax is levied against the person receiving property from the decedent’s estate. Some states have an estate tax and some states have an inheritance tax. At this time, Virginia has neither.

INTERESTED TRUSTEE – A trustee who is also (1) a beneficiary of the trust of which he or she is a trustee; (2) married to and living together with a beneficiary of the trust of which he or she is a trustee; (3) the father, mother, child, brother, or sister, of a beneficiary of the trust of which he or she is a trustee; (4) an employee of a beneficiary of the trust of which he or she is a trustee; (5) a corporation or any employee of a corporation in which the stock holdings of the trustee and the trust are significant from the viewpoint of voting control; or (6) a subordinate employee of a corporation in which the trustee is an executive.

INDEPENDENT TRUSTEE – A trustee who is not an Interested Trustee.

PERSONAL REPRESENTATIVE – Also known as an “executor.” The person(s) or entities named in a will to administer the probate estate, which means they collect the probate assets, pay expenses and distribute the balance of the probate estate to the beneficiaries named in the will.

PORTABILITY – As between spouses, within nine (9) months after the death of the first spouse, the deceased spouse’s remaining estate tax exemption can be transferred to the surviving spouse. The act of “porting” the decedent’s estate tax exemption can only be accomplished by filing a federal estate tax return (Form 706) even if the decedent’s taxable estate was less than the estate tax exemption in effect upon the decedent’s death.

PROBATE – The process of administering the estate of a person who died with a will (testate) or without a will (intestate). Probate consists of qualifying the personal representative before the clerk of court, marshalling the decedent’s assets, paying all debts, expenses, and taxes, filing required reports with the Commissioner of Accounts, and ultimately distributing the estate assets to its beneficiaries or intestate heirs.

PROBATE COSTS – Fees paid to the Clerk of the Circuit Court and the Commissioner of Accounts for settling an estate. In Virginia, the probate tax is $1 per $1,000 of assets. Additionally, there are recording fees and fees payable to the Commissioner for review of certain required filings.

PROBATE ESTATE – The assets you own at your death which do not pass to someone else automatically at your death by reason of the way the asset is titled or by contract. The assets in your probate estate pass by your will (or under the intestacy rules if you die without a will) and are handled or administered by your Personal Representative.

MARITAL DEDUCTION – An unlimited deduction to your taxable estate for all assets left or given to or for the benefit of your spouse, whether passing outright or in a qualifying trust.

SURETY – A statutory requirement that someone else, usually an insurance company or bonding company, execute the bond with the Executor or Testamentary Trustee to insure the proper handling of the assets by the Executor/Trustee. Virginia will always require a surety bond on an out-of-state personal representative.

TAXABLE ESTATE – The assets which you own or have control of at your death (even if the ownership or benefit passes automatically to someone else at your death).

Examples:

Life insurance policies which you own or control
Retirement plan assets which you own
Revocable trusts which you control or benefit from
Property titled jointly with right of survivorship (eg. your home)
Joint accounts with right of survivorship

TRUST – A legal entity for holding and administering assets on specific terms set out in a trust agreement administered by a Trustee. A trust can be created during your life (inter vivos) or as a part of your will (testamentary). A revocable trust reserves the right to the grantor to change or cancel the trust. An irrevocable trust cannot be changed or canceled once it is established.

UNIFIED CREDIT – A tax credit offsetting taxes on lifetime gifts or testamentary transfers currently equal to $11,580,000 for each donor. Thus, a person who dies with a net taxable estate of less than $11,580,000 pays no federal estate tax. Married couples can transfer over $23 million to their beneficiaries without owing any federal estate tax. The tax rate on transfers over the exemption is 40%. Note, however, that the exemption will be reduced automatically in 2026 to $5 million per person, indexed for inflation. It could also be decreased by Congress at any earlier time.

VIRGINIA ESTATE TAX – An estate tax levied by the Commonwealth of Virginia on the taxable estate as defined by the Federal estate tax. Currently there is no Virginia estate tax. BUT, many other states do impose either an inheritance tax or an estate tax and have exemptions which are less than the federal exemption amount.